Submitted by Jeffrey Snider – Alhambra Investment Partners
Every once in a great while, you run into a mainstream article or news story that actually breaks through the thick cloud of conventional nonsense that passes for expert commentary. Despite clear signs about why people the world over should be worried about China, day after day we are told there is nothing to worry about. Their currency is in no trouble because, supposedly, they learned from the Asian flu of 1997 and 1998 and hoarded the largest mass of forex “reserves” ever conceived.
China’s $3 trillion-plus in foreign currency reserves, the biggest such stockpile in the world, would seem to be a gold-plate insurance policy against the country’s current market chaos, a depreciating currency and torrent of capital leaving the country.
And then the truth of it, which is much, much different:
Then there are other liabilities that China needs to cover, such as the nation’s foreign currency debt to finance and manage imports denominated in overseas currencies. When those factors are taken into account, some $2.8 trillion in reserves may already be spoken for just to cover its liabilities, according to Hao Hong, chief China strategist at Bocom International Holdings Co.
I think that estimate far too light, but that it is being suggested at all in this context is noteworthy. Forex “reserves” are not what they have been proclaimed to be; nor is the “dollar” system that leads to this mismatch between function and interpretation. China has $3.3 trillion in foreign “reserves” but they are not that. They are instead only one half of the picture, one side of a double-counted ledger. What is on the other side is much more of a mystery and it is that side that holds both all the answers and all the monsters.
Given all that has taken place this week, it is unsurprising to find the PBOC by Friday speaking about more soft measures that might be taken to curb the turmoil. But when you appreciate their suggestive stance for what might be between the lines of guarded wording, it only raises more substantive questions. First, in a statement issued today, the PBOC once more proclaimed its commitment to a stable currency which again more than suggests “devaluation” is devastating financial withdrawal. They claim that they will allow more interest rate liberalization to account for it, but that, too, speaks more about the desperate situation that they would at this late stage essentially appeal to outsideforces. This cannot be overstated (as I noted here; subscription required).
Even more revealing, however, was that the PBOC promised, cryptically, to revisit some of the “stimulus” that was used in 2014:
The central bank will use medium-term loans, and pledged supplementary loans and credit policies to support key areas of the economy.